Traditional Venture Fund vs Rolling Venture Fund
Rolling Venture Funds are a hot commodity of the moment in the venture investing world. Pioneered by AngelList, they are a new form of venture capital fund structure meant to empower first-time fund managers to turn their network and audience into a small recurring stream of committed capital that they can deploy into startups on an ongoing basis. We wanted to quickly breakdown the new structure and explain how rolling funds work and how they are different than traditional venture capital funds.
Typical VC funds typically have a 7–10 year lifecycle with the first 3–4 years dedicated as the funds “active phase”, which is essentially when the General Partners or GPs (people sourcing and vetting investment opportunities) are looking to deploy capital into new investment opportunities (companies they believe have growth opportunities ahead). Traditional VC funds have “committed” capital, meaning when you hear a fund announce a “$100M” fund, they aren’t actually holding the money. Limited Partners or LPs (pension funds, endowments, hedge funds, family offices, and other accredited investors) commit to a certain amount of 💰 that they will make available to the General Partners over the life of the fund. When the GPs of the fund find an investment opportunity they agree on, they must bring it to their LPs and “call” or request the capital necessary to fill the investment be released.
Generally speaking, the fund deploys roughly 40–50% (not exact, and this number can vary from fund to fund but this generally holds) of its committed capital during its 4-year active period. The fund then goes dormant, meaning that for the next 3–6 years the GPs will not look to make investments in new companies, but rather support their existing investments and help them grow and scale. What about the remaining 50–60% (we left management fees out of this breakdown)? Well, that money is meant to be deployed over that 3–6 year timeframe to support existing investments (bridge round, emergency capital, etc.) and for the fund to exercise its pro-rata rights, which essentially allows them to buy shares in subsequent funding rounds to maintain the % of ownership the fund has. Whew, that was a mouth full, so how do Rolling Funds differ?
Rolling Funds (so far) are structured on a quarter-long lifecycle, that is it, the fund is “active” like the traditional fund for 90 days. But don’t fret if it sounds like this is a painfully short lifetime. Rolling Funds are subscribed to by LPs on a subscription basis. What does that mean, each quarter the LPs commits to a certain 💰 amount and on the first day of that quarter puts their commitment into the fund along with all the other LPs and the fund is now active and goes to work. Unlike the Traditional Fund, the Rolling Fund will look to deploy 100% of their held capital(meaning the fund holds the $$ that was committed for the quarter by the LPs) in that 90 day “active” window. Once the quarter ends the fund closes and becomes “dormant” like the traditional VC fund.
The major difference is on the first day of the next quarter, the LPs (if they choose to continue subscribing) send in their quarterly commitment, and a new (legally separate) fund is created with fresh capital and the same 90-day journey to deploy their “held” capital begins again. If during a quarter, the fund does not deploy all the held capital that is raised, those funds roll over into the next quarter and are combined with the fresh capital from the LPs subscription in the new quarter's fund. Without having to make capital “calls” the goal of these Rolling Funds is to empower the GPs to move quickly and make investments in startups without both parties needed to wait for LPs to get onboard. With fresh capital each quarter, Rolling Funds will be in a constant state of new deal-finding which is a positive for founders looking for capital. One thing that is yet to be seen is how Rolling Funds will a) support existing investments that require additional capital, or b) when the opportunity to exercise pro-rata rights comes into play.
Given that these Rolling Funds don’t have a built-in “reserve” pool like a Traditional Fund could GPs work with their LPs to coordinate quarter to quarter to adjust the size of their “subscription” to the fund in the event that a quarter arises when an investment from a previous fund requires additional capital and/or the opportunity to excise pro-rata rights. Obviously, this will require the GP and their LPs to be aligned on the opportunity but it does present an interesting opportunity to increase capital in a given quarter to maximize a stake in a subsequent funding round.
Sorry for this post getting a little longer than our usual but we wanted to really dive into the function of both of these fund structures. Long story short, Rolling Funds will more consistently be active with fresh capital whereas towards the end of a Traditional Funds “active” period, they might not have as much capital to deploy in as many deals until they raise another fund. We hope this is a helpful resource so you can understand the mechanics of both these structures and as a founder seeking funding, you can leverage that into aligning your startup with the right type of venture partner.
Originally published at https://talkinsaasy.com on October 28, 2020.